Repair Regulations Adaptations · – Capital expenditures, – Materials and supplies, and ... provide a better layout for the showroom and its offices ... Not a new or different

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Repair RegulationsAdaptations

Kristy Maitre – Tax SpecialistCenter for Agricultural Law and Taxation October 28, 2015

Overview

• § 263(a) Requires capitalization for amounts:– Paid for new buildings, permanent improvements, or betterments made to increase the value of any property and

– Paid in restoring property or in making good the exhaustion for which an allowance has been made

• § 162 Permits a deduction for amounts that are paid for repairs and maintenance to tangible property if the amounts paid are not otherwise required to be capitalized

• Regulations purpose is to clarify the distinction between these standards

What Did this Mean as It Relates to a Betterment, Restoration or Adaptation?

• The improvement standard requires the taxpayer to analyze the building and the building systems in determining whether capitalization is required or they can expenses under §162

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When is a Cost an Improvement?

• If it results in:

– Betterment

– Adaptation

– Restoration

– B A R = Improvement = Depreciate

What is a Unit of Property?

• Building and the structural components• Building systems

– Must apply improvement standards separately to each building structure and to each building system

• Roof – included in the meaning of building structure under Reg. §1.48‐1(e)(1)

• Condominium ‐ the individual unit and the structural components that are part of the condominium unit

• Cooperative ‐ the portion of the building in which the taxpayer has possessory rights and the structural components that are part of the portion of the building subject to the taxpayer's possessory rights

• For real and personal property other than buildings, the regulations generally define a UOP as all components that are functionally interdependent, unless the taxpayer used a different depreciation method or recovery period for a component at the time it was placed in service

Separate Categories

• The regulations provide for the separate categories of a building creating multiple units of property

• Prior law treated the building inclusive of all the building systems as a single UOP

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Other Separate Categories

• Plant Property

• Network Assets

• Leased property other than leased buildings

– The amount paid for an improvement = an amount to acquire or produce the UOP

– Improvements ‐ generally are not a UOP separate from the UOP improved

Unit of Property

• Once the unit‐of‐property is determined, the new improvement standards from the final regulations can be applied

Further Defining a Unit of Property

• All the components of property that are functionally interdependent– Functional interdependence occurs if a component cannot be

placed in service without another component

• Special rules apply for determining the unit of property for buildings, plant property, and network assets

• Special rules for determining the units of property for condominiums, cooperatives, and leased property, and for the treatment of improvements (including leasehold improvements)

• The regulations generally defined a building as a unit of property, but required the application of the improvement standards to the building structure and the building systems

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Unit of Property

• The UOP serves as the measure of a piece of property

• Guidance concerns how a UOP may be:– Acquired– Placed in service– Repaired, or – Improved – application of the improvement standards

• UOP rules apply only for:– Capital expenditures,– Materials and supplies, and– Amounts paid to acquire, produce, or improve tangible property

Unit of Property

• The unit‐of‐property must be identified before determining whether an expenditure can be deducted or must be capitalized

• Generally, an expenditure must be capitalized if it improves a unit‐of‐property

• An expenditure improves a unit‐of‐property if the amount paid results in a betterment, restoration, or an adaptation to a new or different use (the "improvement standards")

Exception to “functionally interdependent” Standard

• In certain situations, a component may be treated as a separate UOP at the time it is placed in service

• A client may properly treat the component as a different class of property from the larger UOP for MACRS depreciation purposes

• A client may also properly depreciate the component using a different depreciation method from the larger UOP

• Finally, a client may change the treatment of a component in any later year to its proper MACRS class or depreciation method

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Exception to “functionally interdependent” Standard

• The reclassified portion of the UOP is treated as a separate UOP for capitalization purposes

• For example, a client may classify the tires of a tractor as a separate asset for depreciation purposes

• Thus a client who makes an improvement to the differently‐classed tires would only need to capitalize the improvement costs to the tires, not the UOP of the truck

Requirement to Capitalize Amounts Paid for Improvements

• A client generally must capitalize the amounts paid to improve a unit of property, but– Review § 263A for the requirement to capitalize the direct and

allocable indirect costs of property produced by the client and property acquired for resale

– Review § 1016 for adding capitalized amounts to the basis of the unit of property

– Review § 168 for the treatment of additions or improvements for depreciation purposes

• For purposes of this section, a unit of property is improved if the amounts paid for activities performed after the property is placed in service by the taxpayer—– (1) Are for a betterment to the unit of property – (2) Restore the unit of property; or– (3) Adapt the unit of property to a new or different use

Plumbing System – Unit of Property

• Plumbing systems (including pipes, drains, valves, sinks, bathtubs, toilets, water and sanitary sewer collection equipment, and site utility equipment used to distribute water and waste to and from the property line and between buildings and other permanent structures)

• All of these components must work in order for the system to function properly

• The system is a single UOP because it consists of components that are functionally interdependent

• This essentially creates a smaller unit of property, or component, to measure the expenditure against

• This treatment will have two effects on a UOP– First, an improvement made to a component of a UOP will be considered an

improvement made to the UOP as a whole– Second, a taxpayer must then capitalize the costs of acquiring, producing, or

improving the UOP

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Adaptations

• A taxpayer must capitalize as an improvement an amount paid to adapt a unit of property to a new or different use

• In general, an amount paid to adapt a unit of property to a new or different use occurs if the adaptation is not consistent with the taxpayer’s ordinary use of the unit of property at the time originally placed in service by the taxpayer

What is an Adaptation of a Unit of Property?

• An amount paid to improve a building is an adaptation if it is paid to adapt the building structure or any one of its buildings systems to a new or different use

– Building

– Condominium

– Cooperative

– Leased building or leased portion of building

Examples

• The following examples illustrate the application only and do not address whether capitalization is required under another provision Code

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Example A

New or different use: change in building use

• Andrew is a manufacturer and owns a building that it has used for business since 1985 the year it was placed in service

• In 2015, Andrew converts its building into a showroom

• To convert the facility, he: – Removes and replaces various structural components to provide a better layout for the showroom and its offices

– Repaints the building interiors

– Replacing them with comparable and commercially available replacement materials

Example A : continued

New or different use: change in building use

• An amount paid to improve a building occurs if the amount adapts the building structure or any designated building system to a new or different use

• Andrew paid to convert the building into a showroom adapting the building structure to a new or different use

• The conversion to a showroom is not consistent with Andrew’s ordinary use of the building structure at the time it was placed in service

• Andrew must capitalize the amount paid to convert the building into a showroom

Example B

Not a new or different use: leased building

• Betty owns and leases out space in a building consisting of twenty retail spaces

• The space was designed to be reconfigured; that is, adjoining spaces could be combined into one space

• One of the tenants expands its occupancy by leasing two adjoining retail spaces

• To facilitate the new lease, Betty removes the walls between the three retail spaces

• The walls between spaces are part of the building and its structural components

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Example B

Not a new or different use: leased building


• The amount paid to convert three retail spaces into one larger space for an existing tenant does not adapt Betty’s building structure to a new or different use because the combination of retail spaces is consistent with her intended, ordinary use of the building structure

• The expenses can be taken as ordinary and necessary expenses no capitalization is required

Example C

Not a new or different use: preparing building for sale

• Dawn owns a building consisting of twenty retail spaces, which she has decided to sell

• In anticipation of selling the building, she pays to: – Repaint the interior walls – Refinish the hardwood floors


• Preparing the building for sale does not constitute a new or different use for the building structure

• The amount paid by Dawn to prepare the building structure for sale does not improve the building and is not required to be capitalized

Example D:New or different use: land

• Randy owns a parcel of land on which he previously operated a manufacturing facility

• The land is the unit of property• When operating the manufacturing facility, the land

became contaminated with wastes from its manufacturing processes

• He discontinued manufacturing operations at the site and decides to develop the property for residential housing

• In anticipation of building residential property, he pays an amount to remediate the contamination caused by the manufacturing process

• In addition, he pays to regrade the land so that it can be used for residential purposes

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Example D : continuedNew or different use: land with a twist

• The amounts that he pays to clean up wastes do not adapt the land to a new or different use

– Regardless of the extent to which the land was cleaned, because this cleanup merely returns the land to the condition it was in before the land was contaminated in Randy’s operations – here we have a betterment that must be capitalized

Example D : continuedNew or different use: land with a twist

• However, the amount paid to regrade the land so that it can be used for residential purposes adapts the land to a new or different use

• That is inconsistent with Randy’s intended ordinary use of the property at the time it was placed in service

• The amounts paid to regrade the land must be capitalized as improvements to the land

Example ENew or different use: part of building

• Ellen owns a building which operates a retail drug store

• The store consists of a pharmacy for filling medication prescriptions and various other departments

• Ellen decides to create a walk‐in medical clinic

• Ellen must reconfigure the pharmacy building and builds new walls creating an examination room, lab room, reception area, and waiting area

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Example ENew or different use: part of building

• In addition, she installs additional plumbing, electrical wiring, and outlets to support the lab

• Ellen also acquires § 1245 property, such as computers, furniture, and equipment necessary for the clinic

• Ellen treats the amounts paid for those units of property as costs of acquiring new units of property under §1.263(a)‐2

Example E: continuedNew or different use: part of building

• An amount paid is an improvement if it adapts the building structure or any of the building systems to a new or different use

• The cost to convert part of the retail drug store building structure into a medical clinic adapts the building structure to a new and different use

• The amounts paid to add to the plumbing system and the electrical systems to support the new medical services are part of the adaptation

• Ellen must treat the amount paid for the conversion of the building structure, plumbing system, and electrical system as an improvement to the building and capitalize them as an adaptation

Example FNot a new or different use: part of building

• Frances owns a building in which it operates a grocery store

• The grocery store includes various departments for fresh produce, frozen foods, fresh meats, dairy products, toiletries, and over‐the‐counter medicines and separate counters for deli meats, prepared foods, and baked goods

• To accommodate its customers’ shopping needs, Frances decides to add a sushi bar

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Example F : continuedNot a new or different use: part of building

• To create the sushi bar, she a sushi counter and chairs, additional wiring and outlets to support the counter, and install additional pipes and a sink, to provide for the safe handling of the food

• She also pays amounts to replace flooring and wall coverings with decorative coverings to reflect more appropriate décor

• The sushi counter and chairs are section 1245 property

• Frances treats the amounts paid for those units of property as costs of acquiring new units of property under §1.263(a)‐2

Example F : continuedNot a new or different use: part of building

• An amount paid is an improvement if it adapts the building structure or any of the building systems to a new or different use

• The amount paid to convert a part of Frances’s retail grocery into a sushi bar area does not adapt the building structure, plumbing system, or electrical system to a new or different use

• The amount paid by Frances to replace the wall and floor finishes, add wiring, and add plumbing to create the sushi bar space does not improve the building unit of property and is not required to be capitalized

Leased Property

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Unadjusted Basis

• The unadjusted basis of an eligible building is the basis determined without regard to any adjustments or amounts for which the taxpayer has elected to treat as an expense (for example, under sections 179, 179B, or 179C)

Eligible Building Property Leased to the Client

• The unadjusted basis of eligible building property leased to the taxpayer is the total amount of (undiscounted) rent paid or expected to be paid by the lessee under the lease for the entire term of the lease

• Including renewal periods if all the facts and circumstances in existence during the taxable year in which the lease is entered indicate a reasonable expectancy of renewal

Leased Building

• UOP = leased building & structural components or leased portion of building & structural components

• Amounts paid through construction allowance

• Lessee improvements paid as substitute for rent

– Amounts capitalized by lessor may not be capitalized by lessee

– Improvements made by lessor are not separate UOP

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General Rule

• Capitalize improvements

• Regulatory requirements for repairs or maintenance are disregarded in determining improvements

• Indirect costs that do not benefit or are not incurred by reason of improvement are not capitalized

Determine the Lease Value for the Safe Harbor

• Clancy leases space in a local strip mall

• Basis of building is the Rent per month X 12 X the term of the lease

• $4,000 X 12 X 20 year lease = $960,000

Leasehold Improvements

• The regulations clarify that an amount initially capitalized as a lessee improvement is treated as:– A cost of acquiring or producing a unit of property and

constitutes a unit of property separate from the underlying leased property

– The lessee should be treated as if they have acquired new property when they make a leasehold improvement

• For lessors, the regulations clarify that an amount capitalized for a leasehold improvement owned by the lessor is not a unit of property separate from the underlying property

• The a lessor should be treated in the same manner as any other property owner when making an improvement to his or her property

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Lease Example

• A lessee of an office space in a large building remodels the bathroom in the office

• The expenditure is likely a capital improvement because work was done on a major portion of the plumbing system located within the office space

• However, if the lessor performed the same work, it

• might be considered a repair because the work only affected a small amount of the building’s entire plumbing system

Review/Summary

• An amount is paid to adapt a unit of property to a new or different use if the adaptation is not consistent with the taxpayer’s ordinary use of the unit of property at the time originally placed in service by the taxpayer.”

• In making the determination of “consistent with the taxpayer’s ordinary use” you must consider all of the facts and circumstances

• The reconfiguration of retail spaces within a leased building by a lessor to accommodate different retail lessees was not considered a new or different use

Review/Summary

• The reconfiguration of a pharmacy building to create a walk‐in medical clinic was considered an adaptation to new use

• The reconfiguration of a grocery store to add a sushi bar was not considered an adaptation to new use

• In most of the examples, the client also acquired new personal/§1245 property, and the new property was treated separately as additional units of property which had to be capitalized and depreciated separately

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Other ExamplesExample Not a New or Different Use New or Different Use

Facts Adding additional stables to a Barn

Converting the barn to a home

Single Rental PropertyConverted into three units for rent

Rental home converted to a store front

Land used for growing Christmas trees converted to land for growing sunflowers – land regrading

Divided into lots for sale to build personal residences – land regrading

Conclusion Consistent with the intended, ordinary use of the building

Not Consistent with the intended, ordinary use of the building

Review

• Repair = Deduction

• Betterment, Renovation or Adaptation = Capitalize

• Adaptation

• New or different use if the adaptation is not consistent with the clients intended, ordinary use of the UOP at the time it was originally placed in service

Questions To Ask Your Clients?

• Betterment– Did this improve a material condition or defect?– Did the condition or defect occur before the purchase of the

asset?– Did you enlarge, expand or add an extension to the property?– Was the capacity increased in the UOP?– What about productivity, strength, quality or output, did that

increase?– Do they meet the reasonable expect to increase the above? – Did this involve a building or building system or personal

property?– Look at the

• Purpose of the expenditure• The physical nature of the work performed• The effect the expenditure had on the unit of property

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• Restorations

– Is this a replacement of a component of a UOP where a loss was deducted, other than a casualty loss?

• Remember salvage value does not apply

– Does it restore the UOP due to a casualty loss or event?

– Did it return the UOP to it ordinary and efficient operation state?

• Was the UOP in a state of disrepair and can no longer function


• Restorations

– Did you rebuild the UOP to a like new condition after it was fully depreciated?

• Or is it still on the depreciation schedule?

– Is the replacement a part or combination of parts that are a major component or a structural part of the UOP?

– Doe the part perform a critical and discrete function or is it incidental?


• Adaptation

– Did you change the use of this property from its original intended use?

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Building Safe Harbor

Building Safe HarborQualifying Businesses

• The client can benefit from the buildings safe harbor, if they are a “qualifying taxpayers” – Average annual gross receipts for the three preceding tax years is less than or equal to $10,000,000

• There are specific rules provided taxpayers who have been in existence less than 3 years

• If one of the 3 preceding tax years is a short year, then the gross receipts from that year must be annualized

• The term “gross receipts” is specifically defined in the regulations to include total sales (net of returns or allowances), all amounts received for services, all investment or other income, and is not reduced by the cost of goods sold

Buildings Safe Harbor

• A qualifying small taxpayer may elect to not apply the improvement rules to an eligible building if:

– The total amount paid during the taxable year for repairs, maintenance, improvements, and similar activities performed on the building does not exceed the lesser of:

• $10,000; or

• 2 percent of the unadjusted basis of the building

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Treatment of Safe Harbor Amounts

• Amounts paid by client for:– Repairs– Maintenance– Improvements, and

• Similar activities to which the client:• Properly applied the safe harbor and • Properly makes the election are not treated as

improvements and may be deducted under §1.162‐1 or §1.212‐1 in the taxable year the amounts are paid

• Provided they meet the criteria

Safe Harbor

• The client may elect annually on a building‐by‐building basis to not apply the capitalization requirements and improvement rules to an eligible building property if :– The total amount paid during the year for repairs, maintenance,

improvement, cannot exceed the lesser of:– 2% of the unadjusted basis of the building, OR– $10,000

• The “total amount paid,” must include amounts expensed under other safe harbors within the repair regulations

• If the total amount paid in a year on an eligible building exceeds this safe harbor allowance, then this election is not available for that particular building during that tax year, and the improvement and capitalization rules must be applied

Eligible Building Property

• To be an “eligible building property” for this safe harbor, a building may be either owned or leased, and must have an unadjusted basis (meaning not reduced by depreciation or amortization expenses) of $1,000,000 or less

• As long as a taxpayer meets the gross receipts rule, there is no limit on the number of buildings they can own that qualify as an “eligible building property.”

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Safe Harbor Exceeded

• If total amounts paid exceed the safe harbor limitations then the safe harbor election is not available for that eligible building property

• The taxpayer must apply the general improvement rules to determine whether amounts are for improvements to the unit of property

Example: Safe Harbor for Small Taxpayers Applicable

• Allan is a qualifying taxpayer and owns an office building in which he provides consulting services

• In 2015, the building has an unadjusted basis of $750,000

• In 2015, Allan pays $5,500 for repairs, maintenance, improvements and similar activities to the office building

• The building unit of property has an

• The aggregate amount paid by Allan during 2015 for repairs, ($2,000) maintenance, ($1,346) improvements ($6,100)and similar activities ($450) on the eligible building property totaling $9,896

Example: Safe Harbor for Small Taxpayers Applicable

• The amount does not exceed the lesser of $15,000 (2 percent of the building’s unadjusted basis of $750,000) or $10,000

• Allan may elect to not apply the capitalization rule to the amounts paid for repair, maintenance, improvements, or similar activities on the office building in 2015

• He properly makes the election for the office building and the amounts otherwise constitute deductible ordinary and necessary expenses incurred in carrying on a trade or business, Allan may deduct these amounts

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Example 2

• Brittney owns two rental properties

• Building A = unadjusted basis of $300,000

• Building B = Unadjusted basis of $300,000

• Building A– Improvements of $5,000 was performed on the property

– $300,000 X 2% = $6,000 or $10,000

– Brittney may ELECT not to apply the capitalization rules and deduct as an expenses the $5,000

Example 2 ‐ continued

• Building B

– Improvements of $7,000 was performed on the property

– $300,000 X 2% = $6,000 or $10,000

– $7,000 exceeds the lesser of the 2 limitations

– This must be capitalized

Example 3

• Kristy owns an office building with an unadjusted basis of $750,000

• Paid $5,000 for repairs maintenance and improvements

– Unadjusted basis is less than 1M

– $750,000 X 2% = $15,000 or $10,000

– Kristy is allowed to expenses costs

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Time and Manner of Election

• The client makes the election by attaching a statement to the taxpayer’s timely filed original Federal tax return (including extensions) for the taxable year in which amounts are paid for repairs, maintenance, improvements, and similar activities performed on the eligible building property qualify under the safe harbor

• The statement must be titled, “Section 1.263(a)‐3(h) Safe Harbor Election for Small Taxpayers” and include the client’s name, address, taxpayer identification number, and

• A description of each eligible building property to which the taxpayer is applying the election

• In the case of an S corporation or a partnership, the election is made by the S corporation or by the partnership, and not by the shareholders or partners

• An election may not be made through the filing of an application for change in accounting method or, before obtaining the Commissioner’s consent to make a late election, by filing an amended Federal tax return

• A client may not revoke an election

Time and Manner of Election

• A description of each eligible building property to which the taxpayer is applying the election

• In the case of an S corporation or a partnership, the election is made by the S corporation or by the partnership, and not by the shareholders or partners

• An election may not be made through the filing of an application for change in accounting method or, before obtaining the Commissioner’s consent to make a late election, by filing an amended Federal tax return

• A client may not revoke an election

Routine Maintenance

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Routine Maintenance

• Routine maintenance consists of recurring work a building owner does to keep an entire building, or each system in a building, in ordinarily efficient operating condition

• Buildings include the building structure as a whole and nine separate systems

• Routine maintenance includes the following activities:– Inspection– Cleaning, and– Testing of the building structure and/or each building system,

and– Replacement of damaged or worn parts with comparable and

commercially available replacement parts

Routine Maintanence Buildings Safe Harbor

• There are two big limitations on routine maintenance:

– The ten‐year rule, and

– The no betterments or restorations

Ten‐year Rule

• Routine maintenance can be performed and deducted under the safe harbor any time during the property’s useful life, even after it has been fully depreciated

• However, building maintenance qualifies for the routine maintenance safe harbor only if:– When the building or building system are placed into service there is a reasonable expectation to perform such maintenance more than once every ten years considering:

• Recurring nature of the activity

• Industry practice

• Manufacturers’ recommendations, and

• The business experience with similar or identical property

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Ten‐year Rule

• The more than once every 10 year requirement would generally eliminate use of the routine maintenance safe harbor for building components that typically don’t need such frequent maintenance:– Roofs– Windows, and – Wooden or tile flooring

• However, repairs to such components may be currently deductible under the regular IRS repair regulations– For example, the regular repair regulations provide that installation of a new waterproof membrane (top layer) on a building’s roof to eliminate leaks through original (worn) membrane is a deductible repair

No Betterments or Restorations

• The routine maintenance safe harbor is intended for expenses property owners incur to keep their property in ordinarily efficient operating condition

• The maintenance must be attributable to the client’s use of the property, not that of a previous owner

• Thus, the safe harbor does not apply to scheduled maintenance performed shortly after purchasing the building

• The safe harbor is not supposed to be used to currently deduct major remodeling or restoration projects

• It specifically does not apply to expenses for betterments or restorations of buildings or other business property in a state of disrepair

Clarify

• The final regulations retain the temporary regulations' exclusions from the safe harbor and add several additional exclusions

• Now, the safe harbor expressly excludes amounts paid for:• A betterment to the UOP• An adaptation of the UOP to a new or different use• A restoration to the UOP (other than rebuilding the UOP to a like‐

new condition after the end of its ADS class life or replacing a major component or substantial structural part)

• The repair, maintenance or improvement of network assets• The repair, maintenance or improvement of rotable and temporary

spare parts to which the optional method is applied

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Example

• Thomas buys an apartment building that contains an HVAC system that requires maintenance every four years

• This includes disassembly, cleaning, inspection, repair, replacement, reassembly, and testing of the HVAC system and many of its component parts

• If inspection or testing discloses a problem with any component, the part is repaired, or if necessary, replaced with a comparable and commercially available replacement part

• This expense—no matter how much‐‐qualifies for the routine maintenance safe harbor and is currently deductible, if it meets the safe harbor guidelines

Another Election

• The final regulations give taxpayers the ability to minimize book‐tax differences by providing for an election to capitalize repair costs to the extent such costs are capitalized for book purposes

• A taxpayer may elect to treat amounts paid or incurred during the taxable year for the repair and maintenance of tangible property as amounts paid or incurred to improve that property

• Taxpayers must incur the costs in carrying on a trade or business and

• May only elect to capitalize the costs to the extent such costs are capitalized for the taxpayer's books and records

Making the Election

• A taxpayer elects to capitalize such amounts by including a statement with the following information on its timely filed, original tax return for the year of election:

• Section 1.263(a)‐3(n) Election• Taxpayer's name• Taxpayer's address• Taxpayer's identification number• The Taxpayer is making the election to capitalize

repair and maintenance costs under Reg. section 1.263(a)‐3(n

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Routine Maintenance with Related Betterments

• Edward is a towboat operator that owns and leases a fleet of towboats

• Each towboat is equipped with two diesel‐ powered engines• Assume that each towboat, including its engines, is the unit of

property and that a towboat has a class life of 18 years• At the time that Edward places its towboats into service, he is

aware that approximately every three to four years he will need to perform scheduled maintenance on the two towboat engines to keep the engines in their ordinarily efficient operating condition

• This maintenance is completed while the engines are attached to the towboat and involves :– The cleaning and inspecting of the engines to determine which parts

are within acceptable operating tolerances – Which parts must be reconditioned to be brought back to acceptable

tolerances, and – Which parts must be replaced


• In Year 9 the towboat engines are due for another scheduled maintenance visit

• Edward decides to upgrade the engines to increase their horsepower and propulsion, which would permit the towboats to tow heavier loads

• Accordingly, in Year 9, he pays to perform many of the same activities that it would perform during the typical scheduled maintenance activities such as :– Cleaning– Inspecting– Reconditioning– Replacing minor parts

• At the same time, Edward incurs costs to upgrade certain engine parts to increase the towing capacity of the boats in excess of the capacity of the boats when he placed them in service


• In combination with the replacement of parts with new and upgraded parts, the scheduled maintenance must be completed to perform the horsepower and propulsion upgrade

• Thus, the work done on the engines encompasses more than the recurring activities that Edward expected to perform as a result of its use of the towboats and did more than keep the towboat in its ordinarily efficient operating condition

• The amounts paid to increase the horsepower and propulsion of the engines are for a betterment to the towboat

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• Such amounts are excepted from the routine maintenance safe harbor

• In addition, the scheduled maintenance procedures directly benefit the upgrades

• Therefore, the amounts that Edward paid in Year 9 for the maintenance and upgrade of the engines do not qualify for the routine maintenance safe harbor

• Edward must capitalize the amounts paid for maintenance and upgrades of the engines as an improvement to the towboats

Exceptions to Routine Maintenance

• Fran owns and operates a farming and cattle ranch with an irrigation system that provides water for crops

• Assume that each canal in the irrigation system is a single unit of property and has a class life of 20 years

• At the time Fran placed the canals into service, she expected to have to perform major maintenance on the canals every three years


• This maintenance includes :– Draining the canals– Cleaning– Inspecting– Repairing, and – Reconditioning or replacing parts of the canal with comparable and

commercially available replacement parts

• Fran placed the canals into service in 2009 and did not perform any maintenance on the canals until 2015

• At that time, the canals had fallen into a state of disrepair and no longer functioned for irrigation

• In 2015 6, Fran pays to drain the canals and do extensive cleaning, repairing, reconditioning, and replacing parts of the canals with comparable and commercially available replacement parts

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• Although the work performed on Fran’s canals was similar to the activities that she expected to perform, but did not perform, every three years, the costs of these activities do not fall within the routine maintenance safe harbor

• Routine maintenance does not include activities that return a unit of property to its former ordinarily efficient operating condition if the property has deteriorated to a state of disrepair and is no longer functional for its intended use

• The amounts that Fran pays for work performed on the canals in 2015 must be capitalized if they result in improvements (for example, restorations)

Questions?

Repair Regulations Webinars

• October 29, 2015: Dispositions : Noon to 1 pm CST

• October 30, 2015 Other Remaining Issues of Importance : Noon to 1 pm CST

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JanuaryGetting Ready for Filing Season Webinars

• Free‐ Getting Ready for Filing Season –January 12, no CPE offered

• EITC Due Diligence – January 14 ‐ $35.00

• Identity Theft – January 19 ‐ $35.00

• 1 hour each CPE for EITC Due Diligence and Identity Theft

CALT Website

http://www.calt.iastate.edu/

Tour of the CALT Website

10/28/2015

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CALT Staff

Roger A. McEowenCALT Director and is a Leonard Dolezal Professor in Agricultural LawEmail: [email protected]: (515) 294‐4076Fax: (515) 294‐0700

Kristine A. TidgrenStaff AttorneyE‐mail: [email protected]: (515) 294‐6365Fax: (515) 294‐0700

CALT Staff

Kristy S. MaitreTax SpecialistE‐mail: [email protected]: (515) 296‐3810Fax: (515) 294‐0700

Tiffany KayserProgram AdministratorEmail: [email protected]: (515) 294‐5217Fax: (515) 294‐0700

Documents

Repair Regulations Adaptations · – Capital expenditures, – Materials and supplies, and ... provide a better layout for the showroom and its offices ... Not a new or different